FASB Agenda Takes on Global Spin

The American accounting standards setter adjusts its plans in preparation for U.S. switch to international standards.
Tim ReasonJune 25, 2008

A mid-year update of the Financial Accounting Standards Board’s agenda left no doubt that the group that writes U.S. accounting rules is now actively planning for U.S. GAAP to be replaced by International Financial Reporting Standards, possibly as soon as 2011.

In a webcast hosted by FASB on Monday, board member George Batavick said major projects, including lease accounting, financial statement presentation and revenue recognition, had been shrunk through “dramatic scope change” to ensure they can be completed by 2011, “since we now feel there is some urgency to convergence.”

That’s a reference to the Securities and Exchange Commission’s acceleration of convergence between U.S. and international accounting standards over the past two years, which has shifted the focus from gradually aligning the two systems to actually eliminating U.S. GAAP in favor of IFRS.

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That has resulted in a substantial paring down of projects which FASB and the International Accounting Standards Board have worked on together and have long considered cornerstones of the convergence effort. For example, said Batavick, to simplify lease accounting, FASB will focus only on accounting by lessees, not lessors. Similarly, financial statement presentation will focus only on the look of primary financial statements — changes to other comprehensive income, income taxes and “numerous other types of changes” are being shelved.

Batavick also said FASB is considering tossing out an ongoing effort to adjust existing US income tax accounting, and considering simply adopting the international standard instead. “If ultimately convergence is going to be on IFRS,” Batavick said, “why not just go ahead and adopt their standard lock, stock, and barrel?” Both U.S. and international standard setters have been stripping differences out of their respective income tax rules for some time, he noted, and there seems little point in continuing to tweak the U.S. rules. “This will give us experience in adopting an IFRS standard and it will put us one more step forward toward convergence.”

However, one major sticking point with simply adopting international standards is FIN 48, a U.S. rule that requires companies to disclose the financial risk they face if their taxes are disputed by the collecting government. Under U.S. GAAP, that risk must be disclosed only if the likelihood of it happening reaches a certain threshold. International accounting standards, by contrast, incorporate the risk directly into the reported tax amounts. Exactly how those differences will be resolved is unclear, said Batavick, but the board intends to propose some sort of resolution “in the next few months.”

Despite the fact that FASB’s eye now appears firmly on a future characterized by a move to IFRS, the accounting rule writer still has plenty on its plate. Even under the most accelerated of schedules, such a massive accounting change will take years. “The question then becomes how do we move to this common set of global accounting systems while maintaining the current system,” said Dennis Chookaszian, chair of the Financial Accounting Standards Advisory Council, and moderator of the webcast.

In that vein, Chookaszian began the webcast by describing a large number of new but relatively narrow accounting rules that will go into effect this year — part of an effort to “address deficiencies in today’s accounting and reporting,” explained Batavick. “It is very important, it’s necessary that we continue to maintain US GAAP,” he said.

Among the other issues reviewed in the update were FASB’s recently released exposure draft on loss contingencies, which would require companies to dramatically increase their disclosure about the potential losses — most notably from lawsuits. “We recognize that this will be controversial,” said FASB Technical Director Russ Golden. “We expect companies will say they will be unable to defend themselves and will be providing confidential information to the plaintiffs.” Golden went on to describe a “prejudicial exemption” that companies can invoke if they fear that is the case. However, that exemption is fairly narrow, and unlikely to address many company concerns.

Indeed, panelist Judy O’Dell, chair of FASB’s Private Company Financial Reporting Committee, was quick to note that “one of our major concerns from the private company arena is many small private companies only have one contingency, so . . . this disclosure would definitely be prejudicial.”

Another convergence issue that drew many questions from the audience was the question of earnings per share — a project on which FASB and IASB have worked together for several years. But because FASB and IASB have different accounting standards, noted Batavick, “we know the numerator will not be the same, so the thrust will be ‘how do we get the denominator the same?’” Although FASB is expected to issue an exposure draft on EPS in early July, said Batavick, the proposed rule will not include an effective date. Instead, he said, the boards will ask the public to weigh in on what would be an appropriate date. “Do we want the effective date to be a year or two away, and make that change,” asked Batavick, “or do we somehow want to wait” so that additional convergence efforts make EPS a more consistent figure between issuers who use the two different accounting standards?